10-Q 1 l87972ae10-q.txt THE REYNOLDS AND REYNOLDS COMPANY 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED MARCH 31, 2001 COMMISSION FILE NO. 1-10147 THE REYNOLDS AND REYNOLDS COMPANY OHIO 31-0421120 (State of incorporation) (IRS Employer Identification No.) 115 SOUTH LUDLOW STREET DAYTON, OHIO 45402 (Address of principal executive offices) (937) 485-2000 (Telephone No.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ ---- On May 10, 2001, 72,331,173 Class A common shares and 20,000,000 Class B common shares were outstanding. 2 THE REYNOLDS AND REYNOLDS COMPANY TABLE OF CONTENTS PAGE NUMBER ------ PART I. FINANCIAL INFORMATION Item 1. Financial Statements Statements of Consolidated Income For the Three and Six Months Ended March 31, 2001 and 2000 3 Condensed Consolidated Balance Sheets As of March 31, 2001 and September 30, 2000 4 Condensed Statements of Consolidated Cash Flows For the Six Months Ended March 31, 2001 and 2000 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations For the Three and Six Months Ended March 31, 2001 and 2000 10 PART II. OTHER INFORMATION Item 4. Results of Votes of Security Holders 14 Item 6. Exhibits and Reports on Form 8-K 14 SIGNATURES 15 2 3 THE REYNOLDS AND REYNOLDS COMPANY STATEMENTS OF CONSOLIDATED INCOME FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2001 AND 2000 (In thousands except per share data)
THREE MONTHS SIX MONTHS 2001 2000 2001 2000 --------- --------- --------- --------- Net Sales and Revenues Automotive Solutions Services $ 146,709 $ 121,302 $ 292,842 $ 240,933 Products 84,141 88,923 171,276 180,611 --------- --------- --------- --------- Total Automotive Solutions 230,850 210,225 464,118 421,544 Financial services 10,471 10,515 20,689 20,279 --------- --------- --------- --------- Total net sales and revenues 241,321 220,740 484,807 441,823 --------- --------- --------- --------- Costs and Expenses Automotive Solutions Cost of sales Services 53,017 43,406 104,964 85,592 Products 48,181 48,676 93,983 97,683 --------- --------- --------- --------- Total cost of sales 101,198 92,082 198,947 183,275 Selling, general and administrative expenses 97,917 83,293 198,768 163,929 Financial services 4,559 4,646 8,953 9,495 --------- --------- --------- --------- Total costs and expenses 203,674 180,021 406,668 356,699 --------- --------- --------- --------- Operating Income 37,647 40,719 78,139 85,124 --------- --------- --------- --------- Other Charges (Income) Interest expense 1,564 1,956 3,011 4,093 Interest income (1,744) (1,068) (5,046) (2,301) Equity in net losses of affiliated companies 1,627 486 3,539 1,137 Other (843) (305) (633) (288) --------- --------- --------- --------- Total other charges 604 1,069 871 2,641 --------- --------- --------- --------- Income Before Income Taxes 37,043 39,650 77,268 82,483 Income Taxes 14,844 16,102 31,190 33,876 --------- --------- --------- --------- Income From Continuing Operations 22,199 23,548 46,078 48,607 Income From Discontinued Operations 1,623 9,420 1,623 15,661 --------- --------- --------- --------- Net Income $ 23,822 $ 32,968 $ 47,701 $ 64,268 ========= ========= ========= ========= Basic Earnings Per Common Share Income From Continuing Operations $ 0.31 $ 0.31 $ 0.63 $ 0.63 Income From Discontinued Operations $ 0.02 $ 0.12 $ 0.02 $ 0.20 Net Income $ 0.33 $ 0.43 $ 0.65 $ 0.83 Average Number of Common Shares Outstanding 72,751 77,094 73,424 77,125 Diluted Earnings Per Common Share Income From Continuing Operations $ 0.30 $ 0.29 $ 0.61 $ 0.61 Income From Discontinued Operations $ 0.02 $ 0.12 $ 0.02 $ 0.20 Net Income $ 0.32 $ 0.41 $ 0.64 $ 0.81 Average Number of Common Shares Outstanding 74,740 80,246 74,933 79,515 Cash Dividends Declared Per Common Share $ 0.11 $ 0.11 $ 0.22 $ 0.22
See Notes to Condensed Consolidated Financial Statements. 3 4 THE REYNOLDS AND REYNOLDS COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2001 AND SEPTEMBER 30, 2000 (In thousands)
3/31/01 9/30/00 ----------- ----------- AUTOMOTIVE SOLUTIONS ASSETS Current Assets Cash and equivalents $ 139,564 $ 205,455 Accounts receivable 132,399 127,314 Inventories 13,313 15,287 Other current assets 34,522 35,490 ----------- ----------- Total current assets 319,798 383,546 Property, Plant and Equipment, less accumulated depreciation of $176,589 at 3/31/01 and $166,235 at 9/30/00 151,671 138,108 Goodwill 39,551 31,061 Software Licensed to Customers 45,513 39,479 Other Intangible Assets 113,481 118,575 Other Assets 90,508 85,395 ----------- ----------- Total Automotive Solutions Assets 760,522 796,164 ----------- ----------- FINANCIAL SERVICES ASSETS Finance Receivables 424,033 420,588 Cash and Other Assets 737 541 ----------- ----------- Total Financial Services Assets 424,770 421,129 ----------- ----------- TOTAL ASSETS $ 1,185,292 $ 1,217,293 =========== =========== AUTOMOTIVE SOLUTIONS LIABILITIES Current Liabilities $ 159,905 $ 194,665 Long-Term Debt 111,495 111,124 Other Liabilities 97,367 93,350 ----------- ----------- Total Automotive Solutions Liabilities 368,767 399,139 ----------- ----------- FINANCIAL SERVICES LIABILITIES Notes Payable 209,501 212,176 Other Liabilities 108,967 107,484 ----------- ----------- Total Financial Services Liabilities 318,468 319,660 ----------- ----------- SHAREHOLDERS' EQUITY Capital Stock 139,914 124,872 Other Comprehensive Income (Losses) (9,851) (7,139) Retained Earnings 367,994 380,761 ----------- ----------- Total Shareholders' Equity 498,057 498,494 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,185,292 $ 1,217,293 =========== =========== See Notes to Condensed Consolidated Financial Statements.
4 5 THE REYNOLDS AND REYNOLDS COMPANY CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS FOR THE SIX MONTHS ENDED MARCH 31, 2001 AND 2000 (In thousands) 2001 2000 --------- ----------
AUTOMOTIVE SOLUTIONS Cash Flows Provided By Operating Activities $ 58,123 $ 72,700 --------- --------- Cash Flows Provided By (Used For) Investing Activities Business combinations (14,884) (2,500) Capital expenditures (27,962) (32,097) Net proceeds from asset sales 834 1,676 Capitalization of software licensed to customers (5,036) (11,027) Repayments from financial services 1,556 3,462 --------- --------- Net cash flows used for investing activities (45,492) (40,486) --------- --------- Cash Flows Provided By (Used For) Financing Activities Additional borrowings 611 Principal payments on debt (2,057) (2,061) Cash dividends paid (8,001) (8,422) Capital stock issued 15,762 11,995 Capital stock repurchased (48,656) (19,885) --------- --------- Net cash flows used for financing activities (42,952) (17,762) --------- --------- Effect of Exchange Rate Changes on Cash (1,600) 303 --------- --------- Net Cash Used for Discontinued Operations (33,970) (15,691) --------- --------- Decrease in Cash and Equivalents (65,891) (936) Cash and Equivalents, Beginning of Period 205,455 103,595 --------- --------- Cash and Equivalents, End of Period $ 139,564 $ 102,659 ========= ========= FINANCIAL SERVICES Cash Flows Provided By Operating Activities $ 11,929 $ 10,335 --------- --------- Cash Flows Provided By (Used For) Investing Activities Finance receivables originated (88,845) (72,395) Collections on finance receivables 81,063 65,740 --------- --------- Net cash flows used for investing activities (7,782) (6,655) --------- --------- Cash Flows Provided By (Used For) Financing Activities Additional borrowings 63,203 34,963 Principal payments on debt (65,878) (35,492) Repayments to automotive solutions (1,556) (3,462) --------- --------- Net cash flows used for financing activities (4,231) (3,991) --------- --------- Decrease in Cash and Equivalents (84) (311) Cash and Equivalents, Beginning of Period 456 675 --------- --------- Cash and Equivalents, End of Period $ 372 $ 364 ========= =========
See Notes to Condensed Consolidated Financial Statements. 5 6 THE REYNOLDS AND REYNOLDS COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands except per share data) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The balance sheet as of September 30, 2000 is condensed financial information taken from the audited balance sheet. The interim financial statements are unaudited. In the opinion of management, the accompanying interim financial statements contain all significant adjustments (which consist only of normal recurring adjustments) necessary to present fairly the company's financial position, results of operations and cash flows for the periods presented. (2) INVENTORIES
3/31/01 9/30/00 ------- ------- Finished products $12,827 $14,360 Work in process 216 480 Raw materials 270 447 ------- ------- Total inventories $13,313 $15,287 ======= =======
(3) OTHER INTANGIBLE ASSETS
Useful Life (years) 3/31/01 9/30/00 -------- -------- -------- Customer relationship - Trade Cycle Technology 20 $ 66,219 $ 67,954 Customer relationship - CyberCar 10 14,443 15,238 Other intangible assets 3 - 20 32,819 35,383 -------- -------- Total other intangible assets $113,481 $118,575 ======== ========
Other intangible assets related to Trade Cycle Technology and CyberCar were acquired in the May 2000 purchase of HAC Group LLC. These assets are being amortized on a straight-line basis over their useful lives because this method of amortization best matches amortization expense with expected future revenues. The useful lives for the Trade Cycle Technology and CyberCar intangible assets reflect a strong relationship between HAC Group and the customer that began in 1983. This relationship is expected to continue over the remaining useful life of the Trade Cycle Technology and CyberCar assets. At each balance sheet date the company evaluates the recoverability of intangible assets acquired in the purchase of HAC Group by considering whether cash flows and other factors are consistent with the assumptions used to allocate the purchase price. (4) EQUITY INVESTMENT The company owns 16,500 shares of Kalamazoo Computer Group plc (Kalamazoo) of the United Kingdom, representing about 26% of the outstanding shares. In addition, two of the company's officers are members of the board of directors of Kalamazoo. At March 31, 2001, the market value of the company's Kalamazoo shares was $2,925 based on the closing sale price reported by the London Stock Exchange. This investment is accounted for under the equity method and the carrying value of $20,271 at March 31, 2001, was included with other assets in the company's consolidated balance sheets. At March 31, 2001, the company evaluated the recoverability of its investment in Kalamazoo as required by Statement of Financial Accounting Standards Statement No. 121 and Staff Accounting Bulletin No. 59. As part of its evaluation, management considered the market value and carrying value of its investment, management's likelihood of holding or selling its investment and potential sales proceeds and related tax benefits. Projected future cash flows over periods up to ten years assumed revenues grow at a 6% average rate and operating margins reach 9%. These assumptions assume the successful completion of current product development efforts and market acceptance of the new product by both new and existing customers. Based on this evaluation, no adjustment to the carrying value of the company's investment in Kalamazoo was required. 6 7 (5) COMPREHENSIVE INCOME
THREE MONTHS SIX MONTHS 2001 2000 2001 2000 -------- -------- -------- -------- Net income $ 23,822 $ 32,968 $ 47,701 $ 64,268 Foreign currency translation adjustment (1,678) (65) (1,600) 303 Cumulative effect of accounting change 15 Net unrealized losses on derivative contracts (639) (1,127) -------- -------- -------- -------- Comprehensive income $ 21,505 $ 32,903 $ 44,989 $ 64,571 ======== ======== ======== ========
(6) RESTRUCTURING CHARGES During fiscal year 2000, the company recorded a pre-tax restructuring charge of $10,560. This charge consisted of $4,751 of employee termination benefits, $4,715 of retirement costs and $1,094 of lease obligations. Employee termination benefits represent severance and outplacement benefits for 252 employees, 135 of which were in administrative positions. The remaining 117 employees worked at the Oklahoma City manufacturing facility that was closed during the first quarter of fiscal year 2001. Through March 31, 2001, all of the identified employees have begun receiving severance payments. Retirement costs represent pension and other postretirement benefits in excess of regular plan benefits for 20 employees, including several executives. These incremental benefits will be paid along with normal pension and other postretirement benefits. Lease obligations represent remaining lease payments in excess of sublease rentals for 38 sales offices vacated by the company. Activity related to restructuring accruals was as follows:
Severance Leases ------- ------- Balances 9/30/00 $ 3,960 $ 1,006 Payments (1,459) (81) ------- ------- Balances 12/31/00 2,501 925 Payments (1,304) (138) Expense (Income) Adjustments 109 (96) ------- ------- Balances 3/31/01 $ 1,306 $ 691 ======= =======
(7) DISCONTINUED OPERATIONS Income from discontinued operations included about $.01 per share from the collection of notes receivable obtained in the October 1998 sale of the Healthcare Systems segment and about $.01 per share from tax benefits related to the August 2000 sale of the Information Solutions segment. (8) BUSINESS COMBINATION In November 2000, the company purchased eCustomerCentric Solutions, Inc., a.k.a. DealerKid, a premier provider of electronic customer marketing and relationship management software and services for automotive retailers in the United States and Canada. Privately held DealerKid had revenues of about $2,000 in 2000. The purchase price of $10,452 was paid with $9,509 of cash from existing balances and the issuance of a $943 note payable. This business combination was accounted for as a purchase and the accounts of DealerKid were included in the financial statements since the acquisition date. In connection with this business combination the company recorded goodwill of $11,101, based on a preliminary allocation of the purchase price. Goodwill is being amortized on a straight-line basis over five years. (9) ACCOUNTING CHANGE In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." In June 2000, the FASB amended certain provisions of that statement by issuing SFAS Statement No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." These statements require all derivatives to be recognized as either assets or liabilities in the statement of financial position and to measure those instruments at fair value. Gains or losses resulting from changes in fair values of derivatives are recorded either as a separate component of shareholders' equity or in the income statement depending upon whether the instruments meet the criteria for hedge accounting. Effective October 1, 2000, the company adopted the provisions of these statements. The company has determined that its derivative instruments meet the criteria for cash flow hedge accounting. In the ordinary course of business, the 7 8 company borrows cash to fund investments in finance receivables from the sale of the company's products. The company attempts to limit its interest rate exposure between the interest earned on fixed rate finance receivables and the interest paid on variable rate financing agreements through the use of interest rate management agreements. Interest rate swaps provide for interest to be received on notional amounts at variable rates and provide for interest to be paid on the same notional amounts at fixed rates. Fixed interest rates do not change over the life of the agreements. Variable interest rates are reset at least every 90 days and are based on LIBOR or commercial paper indices and are settled with counterparties at that time. The fair value of the company's derivative instruments was a $25 asset at October 1, 2000, which was recorded as a cumulative effect of accounting change, and a $1,860 liability at March 31, 2001. This liability was included in Financial Services' other liabilities on the consolidated balance sheet. The adjustments to record the cumulative effect of accounting change and the net change in the fair value during the periods presented was recorded, net of income taxes, in other comprehensive income. All existing cash flow hedges were 100% effective. As a result, there was no current impact to earnings because of hedge ineffectiveness. (10) CASH FLOW STATEMENTS Reconciliation of net income to net cash provided by operating activities.
2001 2000 -------- -------- AUTOMOTIVE SOLUTIONS Net Income $ 40,650 $ 57,794 Depreciation and Amortization 24,164 17,297 Deferred Income Taxes 4,287 (480) Deferred Income Taxes Transferred to Financial Services (4,371) (1,805) Income from Discontinued Operations (1,623) (15,661) Losses on Sales of Assets 318 171 Changes in Operating Assets and Liabilities Accounts Receivable (947) 27,712 Inventories 1,974 (8,648) Prepaid Expenses and Other Current Assets (1,905) 1,129 Intangible and Other Assets (3,494) (1,022) Accounts Payable (3,010) 429 Accrued Liabilities (2,246) (8,094) Other Liabilities 4,326 3,878 -------- -------- Net Cash Provided by Operating Activities $ 58,123 $ 72,700 ======== ======== FINANCIAL SERVICES Net Income $ 7,051 $ 6,474 Deferred Income Taxes (4,418) 48 Deferred Income Taxes Transferred from Automotive Solutions 4,371 1,805 Changes in Receivables, Other Assets and Other Liabilities 4,925 2,008 -------- -------- Net Cash Provided by Operating Activities $ 11,929 $ 10,335 ======== ========
8 9 (11) BUSINESS SEGMENTS
THREE MONTHS SIX MONTHS 2001 2000 2001 2000 ---------- ---------- ---------- --------- NET SALES AND REVENUES Retail Management Solutions $141,549 $136,550 $282,205 $276,992 Transformation Solutions 45,500 26,237 95,192 51,788 Documents 43,801 47,438 86,721 92,764 Financial Services 10,471 10,515 20,689 20,279 ---------- ---------- ---------- --------- Total Net Sales and Revenues $241,321 $220,740 $484,807 $441,823 ========== ========== ========= ========= OPERATING INCOME Retail Management Solutions $25,497 $24,817 $51,221 $53,752 Transformation Solutions ($4,139) ($674) ($2,962) $233 Documents $10,377 $10,707 $18,144 $20,355 Financial Services $5,912 $5,869 $11,736 $10,784 ---------- ---------- ---------- --------- Total Operating Income $37,647 $40,719 $78,139 $85,124 ========== ========== ========== ========= 3/31/01 9/30/00 ---------- ---------- ASSETS Automotive Solutions $760,522 $ 796,164 Financial Services 424,770 421,129 ---------- ---------- Total Assets $1,185,292 $1,217,293 ========== ==========
(12) CONTINGENCIES The U.S. Environmental Protection Agency (EPA) has designated the company as one of a number of potentially responsible parties (PRP) under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) at an environmental remediation site. The EPA has contended that any company linked to a CERCLA site is potentially liable for all response costs under the legal doctrine of joint and several liability. This environmental remediation site involves a municipal waste disposal facility owned and operated by four municipalities. The company joined a PRP coalition and is sharing remedial investigation and feasibility study costs with other PRPs. During fiscal year 1994, the PRP coalition received an engineering evaluation/cost analysis of the presumed remedy for the site from its private contractor. However, because the EPA has not yet selected a remedy, potential remediation costs remain uncertain. Remediation costs for a typical CERCLA site on the National Priorities List average about $30,000. The engineering evaluation/cost analysis was consistent with this average. During fiscal year 1996, an agreement was reached whereby the state of Connecticut will contribute $8,000 towards remediation costs. Preliminary remediation continued through March 31, 2001, using Connecticut's contribution. During the fourth quarter of fiscal year 2000, the company was also named a defendant in a cost recovery lawsuit in Dayton, Ohio, regarding another environmental remediation site. Discovery in that lawsuit is in its early stages. Consequently, it is too early to determine the company's liability exposure. The company believes that the reasonably foreseeable resolution of these two matters will not have a material adverse effect on the financial statements. During the quarter ended March 31, 2001, the company incurred $4,228 of costs associated with a work stoppage on a software development contract. These costs included $2,541 of expense to record a reserve for unbilled accounts receivable and $1,687 of operating expenses for which no revenues were recorded during the quarter. This contract has not been formally cancelled. Based on ongoing discussions between the contract parties, the Company is unable to reasonably foresee what impact, if any, final resolution will have on the financial statements. (13) ACCOUNTING STANDARD In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements", which provides guidance on applying generally accepted accounting principles for recognizing revenue. SAB No. 101, as amended, is effective for the fourth quarter of fiscal year 2001. The company is reviewing the impact of SAB No. 101, and does not believe that its adoption will have a material effect 9 10 on the company's financial statements. (14) SUBSEQUENT EVENT On May 2, 2001, an announcement was made by Consumer Car Club Inc. that its carclub.com service has been closed. As a result, the company will write off its $3,200 investment, which was accounted for under the cost method, in the quarter ended June 30, 2001. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2001 AND 2000 (In thousands except per share data) RESULTS OF OPERATIONS CONSOLIDATED SUMMARY
Three Months Six Months -------------------------------------------- ------------------------------------------- 2001 2000 Change % Change 2001 2000 Change % Change ------------------------------------------------------------------------------------------ Net sales and revenues $241,321 $220,740 $20,581 9% $484,807 $441,823 $42,984 10% Gross profit $129,652 $118,143 $11,509 10% $265,171 $238,269 $26,902 11% Operating income $37,647 $40,719 ($3,072) -8% $78,139 $85,124 ($6,985) -8% % of revenues 15.6% 18.4% 16.1% 19.3% Income from continuing operations $22,199 $23,548 ($1,349) -6% $46,078 $48,607 ($2,529) -5% Discontinued operations $1,623 $9,420 ($7,797) -83% $1,623 $15,661 ($14,038) -90% Net income $23,822 $32,968 ($9,146) -28% $47,701 $64,268 ($16,567) -26% Basic earnings per share Income from continuing $0.31 $0.31 $0.00 0% $0.63 $0.63 $0.00 0% operations Net income $0.33 $0.43 ($0.10) -23% $0.65 $0.83 ($0.18) -22% Diluted earnings per share Income from continuing $0.30 $0.29 $0.01 3% $0.61 $0.61 $0.00 0% operations Net income $0.32 $0.41 ($0.09) -22% $0.64 $0.81 ($0.17) -21%
Consolidated revenues grew 9% in the second quarter and 10% year-to-date. Excluding the net effect of acquisitions and divestitures, sales increased 3% over last year for both the second quarter and six months ended March 31, 2001. Internal sales growth for the quarter and six months reflected growth in Retail Management Solutions' computer services revenues and Transformation Solutions' IntelliPath sales. This internal growth was partially offset by lower sales of documents. Consolidated operating income was 15.6% of revenues in the second quarter versus 18.4% last year and 16.1% for six months compared to 19.3% last year. The decline in second quarter operating margins resulted primarily from the fiscal year 2000 acquisition of HAC Group and the November 2000 acquisition of DealerKid. These businesses had lower operating margins than the existing business. The second quarter also included $4,228 of costs ($.03 per share after taxes) related to a work stoppage of a software development contract. See Note 12 to the Consolidated Financial Statements for more information on this software development contract. Year-to-date, operating margins reflect the impact of HAC Group and DealerKid acquisitions and higher research and development (R&D) expenses. R&D expenses were $17,000 in the second quarter and $38,000 year-to-date, compared to $17,000 and $33,000 last year. Interest expense declined from last year because of lower debt balances as the company repaid Information Solutions segment related debt in August 2000. Interest income was higher than last year because of higher investments as a result of the cash proceeds received in August 2000 for the sale of the Information Solutions segment. Equity in net losses of affiliated companies increased $1,141 in the second quarter and $2,402 through six months over last year as a result of the May 2000 equity investment in ChoiceParts LLC. Earnings per share benefited from lower shares outstanding as a result of shares repurchased during the second half of fiscal year 2000 and the first quarter of fiscal year 2001. Share repurchases are discussed further under the Shareholders' Equity caption. Discontinued operations included about $.01 per share from the collection of notes receivable obtained in the October 1998 sale of Healthcare Systems segment and about $.01 per share from tax benefits related to the August 2000 10 11 sale of the Information Solutions segment. RETAIL MANAGEMENT SOLUTIONS
Three Months Six Months -------------------------------------------- -------------------------------------------- 2001 2000 Change % Change 2001 2000 Change % Change ------------------------------------------------------------------------------------------- Net sales and revenues $141,549 $136,550 $4,999 4% $282,205 $276,992 $5,213 2% Gross profit $83,297 $77,167 $6,130 8% $168,932 $158,092 $10,840 7% % of revenues 58.8% 56.5% 59.9% 57.1% SG&A expenses $57,800 $52,350 $5,450 10% $117,711 $104,340 $13,371 13% % of revenues 40.8% 38.3% 41.7% 37.7% Operating income $25,497 $24,817 $680 3% $51,221 $53,752 ($2,531) -5% % of revenues 18.0% 18.2% 18.2% 19.4%
Retail Management Solutions revenues increased slightly over last year for both the second quarter and six months as computer service revenues continued to grow. Computer services revenues, comprised predominately of recurring software support and equipment maintenance revenues, continued to grow because of the increased number of ERA retail management systems supported. This revenue growth was partially offset by a decline in the number of new ERA retail management systems sold. The backlog of new orders for computer systems products and deferred revenues (orders shipped, but not yet recognized in revenues) was $31,000 at March 31, 2001 and at September 30, 2000. Gross profit margins increased over last year primarily as a result of the growth in higher margin computer services revenues. Operating margins reflect higher year-to-date R&D expenses and the second quarter costs incurred in the work stoppage of a software development contract. See Note 12 to the Consolidated Financial Statements for more information on this software development contract. TRANSFORMATION SOLUTIONS
Three Months Six Months ----------------------------------------------- ------------------------------------------------ 2001 2000 Change % Change 2001 2000 Change % Change ----------------------------------------------- ------------------------------------------------ Net sales and revenues $45,500 $26,237 $19,263 73% $95,192 $51,788 $43,404 84% Gross profit $18,545 $10,850 $7,695 71% $41,680 $21,462 $20,218 94% % of revenues 40.8% 41.4% 43.8% 41.4% SG&A expenses $22,684 $11,524 $11,160 97% $44,642 $21,229 $23,413 110% % of revenues 49.9% 44.0% 46.9% 41.0% Operating income (losses) ($4,139) ($674) ($3,465) ($2,962) $233 ($3,195) % of revenues -9.1% -2.6% -3.1% 0.4%
Transformation Solutions revenues grew, in large part, as a result of the May 2000 acquisition of HAC Group LLC. Excluding the impact of acquisitions, sales grew 7% in the second quarter and 17% year-to-date, primarily because of strong growth in the number of IntelliPath systems sold. The second quarter sales growth rate was lower than the year-to-date sales growth rate because Carpoint revenues declined to $6,300 in the second quarter, compared to $8,100 last year. Carpoint revenues are expected to continue to decline during the fiscal year as the contract with Microsoft winds down. Second quarter revenues and operating losses reflect a decline in HAC Group revenues from the first quarter as a result of lower consulting revenues. Operating losses also reflect the decline in Carpoint revenues, increased R&D expenses and operating losses of DealerKid, acquired in November 2000. DOCUMENTS
Three Months Six Months --------------------------------------------- ---------------------------------------- 2001 2000 Change % Change 2001 2000 Change % Change --------------------------------------------- ---------------------------------------- Net sales and revenues $43,801 $47,438 ($3,637) -8% $86,721 $92,764 ($6,043) -7% Gross profit $27,810 $30,126 ($2,316) -8% $54,559 $58,715 ($4,156) -7% % of revenues 63.5% 63.5% 62.9% 63.3% SG&A expenses $17,433 $19,419 ($1,986) -10% $36,415 $38,360 ($1,945) -5% % of revenues 39.8% 40.9% 42.0% 41.4% Operating income $10,377 $10,707 ($330) -3% $18,144 $20,355 ($2,211) -11% % of revenues 23.7% 22.6% 20.9% 21.9%
11 12 Documents sales declined from last year, in part, because of significant one-time sales to a major customer last year. The prior year also included additional sales as forms were modified to reflect legislative changes. Excluding the effect of these two items, documents sales declined about $2,700 or 6% in the quarter and about $4,000 or 4% year-to-date, reflecting the continued migration of business forms products to electronic printing solutions. (The company reports sales of laser printing solutions in both Retail Management Solutions and Transformation Solutions.) Laser printing revenues increased $2,200 in the quarter and $5,500 through six months. Operating margins remained strong for the quarter and six months.
FINANCIAL SERVICES Three Months Six Months --------------------------------------------- ----------------------------------------- 2001 2000 Change % Change 2001 2000 Change % Change --------------------------------------------- ----------------------------------------- Net sales and revenues $10,471 $10,515 ($44) 0% $20,689 $20,279 $410 2% Operating income $5,912 $5,869 $43 1% $11,736 $10,784 $952 9% % of revenues 56.5% 55.8% 56.7% 53.2%
Financial Services revenues were about the same as last year for the second quarter and up slightly for the six months. Average finance receivable balances and interest rates on finance receivables changed very little as compared to last year. Financial Services' interest rate spread remained strong at 3.0% year-to-date, compared to 3.2% last year. The slight decline in interest rate spread resulted primarily because of higher interest rates on borrowings. Bad debt expenses were the same as last year for the second quarter and $713 less than last year through six months. The company has entered into various interest rate management agreements to limit interest rate exposure on financial services variable rate debt. It is important to manage this interest rate exposure because the proceeds from these borrowings were invested in fixed rate finance receivables. The company believes that over time it has reduced interest expense by using interest rate management agreements and variable rate debt instead of directly obtaining fixed rate debt. During March 2001, the company entered into a $20,000 interest rate swap in connection with obtaining $20,000 of variable rate debt. See Note 9 to the Consolidated Financial Statements for additional discussion of interest rate management agreements. LIQUIDITY AND CAPITAL RESOURCES CASH FLOWS Automotive Solutions continued to provide strong cash flows from operating activities during the first six months of the fiscal year. Operating cash flows were $58,123 and resulted primarily from net income, adjusted for noncash charges. Operating cash flow funded the company's investments for normal operations including capital expenditures of $27,962. Capital expenditures included $14,421 for the construction of a new office building near Dayton, Ohio. During the first six months of the fiscal year, the company also capitalized $5,036 of software licensed to customers, representing primarily capitalization of internal costs. Capital expenditures and capitalized software in the ordinary course of business are anticipated to be about $70,000 in fiscal year 2001, which includes about $38,000 for the new office building. Cash used for business combinations related primarily to the November 2000 purchase of DealerKid. See Note 7 to the Consolidated Financial Statements for more information on DealerKid. Fiscal year 2001 cash flows for discontinued operations represent primarily the payment of taxes associated with the sale of the Information Solutions segment in fiscal year 2000. Financial services operating cash flows, collections on finance receivables and additional borrowings were invested in new finance receivables for the company's automotive systems and used to make scheduled debt repayments. CAPITALIZATION The company's ratio of total debt (total automotive solutions debt) to capitalization (total automotive solutions debt plus shareholders' equity) was 19.1% at March 31, 2001 compared to 19.0% at September 30, 2000. Remaining credit available under committed revolving credit agreements was $62,798 at March 31, 2001. In addition to committed credit agreements, the company also has a variety of other short-term credit lines available. The company anticipates that cash balances, cash flow from operations and cash available from committed credit agreements will be sufficient to fund normal operations over the next year. The company has consistently produced strong operating cash flows sufficient to fund normal operations. Strong operating cash flows are the result of stable operating margins and a high percentage of recurring service revenues, which require 12 13 relatively low capital investment. Debt instruments have been used primarily to fund business combinations and Financial Services receivables. In fiscal year 1997, the company filed a shelf registration statement with the Securities and Exchange Commission whereby the company can issue up to $300,000 of notes. Through March 31, 2001, the company has issued $170,000 of notes under this arrangement. Management believes that its strong balance sheet and cash flows should help maintain an investment grade credit rating that should provide access to capital sufficient to meet the company's cash requirements beyond the next year. SHAREHOLDERS' EQUITY The company lists its Class A common shares on the New York Stock Exchange. There is no principal market for the Class B common shares. The company also has an authorized class of 60 million preferred shares with no par value. As of May 10, 2001, except for preferred share purchase rights, the company had no agreements or commitments with respect to the sale or issuance of preferred shares and no preferred shares were outstanding. Dividends are typically declared each November, February, May and August and paid in January, April, June and September. Dividends per Class A common share must be twenty times the dividends per Class B common share and all dividend payments must be simultaneous. The company has paid dividends every year since the company's initial public offering in 1961. During the first six months of fiscal year 2001, the company repurchased 2,512 Class A common shares for $48,656 ($19.37 per share). As of March 31, 2001 the company could repurchase an additional 3,679 Class A common shares under existing board of directors' authorizations. MARKET RISKS INTEREST RATES The Automotive Solutions portion of the business borrows money, as needed, primarily to fund business combinations. Generally the company borrows under fixed rate agreements with terms of ten years or less. The Financial Services segment of the business obtains borrowings to fund the investment in finance receivables. These fixed rate receivables have repayment terms of four to eight years, with five years being the most common term. The company funds finance receivables with debt that has repayment terms consistent with the maturities of the finance receivables. Generally the company attempts to lock in the interest spread on the fixed rate finance receivables by borrowing under fixed rate agreements or using interest rate management agreements to manage variable interest rate exposure. The company does not use financial instruments for trading purposes. See Note 9 to the Consolidated Financial Statements for additional discussion of interest rate management agreements. Because fixed rate finance receivables are directionally funded with fixed rate debt or its equivalent (variable rate debt that has been fixed with interest rate swaps), management believes that a 100 basis point change in interest rates would not have a material effect on the company's financial statements FOREIGN CURRENCY EXCHANGE RATES The company has foreign-based operations in Canada, which accounted for 6% of net sales and revenues for the six months ended March 31, 2001. In the conduct of its foreign operations the company has intercompany sales, charges and loans between the U.S. and Canada and may receive dividends denominated in different currencies. These transactions expose the company to changes in foreign currency exchange rates. At March 31, 2001, the company had no foreign currency exchange contracts outstanding. Based on the company's overall foreign currency exchange rate exposure at March 31, 2001, management believes that a 10% change in currency rates would not have a material effect on the company's financial statements. ENVIRONMENTAL MATTER See Note 12 to the Consolidated Financial Statements for a discussion of the company's environmental contingencies. ACCOUNTING STANDARD See Note 13 to the Consolidated Financial Statements for a discussion of the effect of accounting standards that the company has not yet adopted. 13 14 FACTORS THAT MAY AFFECT FUTURE RESULTS Certain statements in this Management's Discussion and Analysis of the Financial Condition and Results of Operations constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements are based on current expectations, estimates, forecasts and projections of future company or industry performance based on management's judgment, beliefs, current trends and market conditions. Forward-looking statements made by the company may be identified by the use of words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" and similar expressions. Forward-looking statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict. Actual outcomes and results may differ materially from what is expressed, forecasted or implied in any forward-looking statement. The company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. See also the discussion of factors that may affect future results contained in the company's Current Report on Form 8-K filed with the SEC on August 11, 2000, which we incorporate herein by reference. PART II - OTHER INFORMATION ITEM 4. RESULTS OF VOTES OF SECURITY HOLDERS At the Annual Meeting of Shareholders on February 15, 2001, the shareholders of the company voted on and approved the following issues. Issue 1 Election of Directors Shares Shares For Withheld --------------- --------------- Three-year terms Expiring in 2004 Eustace W. Mita 82,710,081 567,063 Philip A. Odeen 82,749,645 527,499 Donald K. Peterson 82,750,088 527,056 Issue 2 Proposal to amend Code of Regulations to permit various electronic and telephonic communications with shareholders and directors. Shares For 82,844,239 Shares Against 273,457 Shares Abstain 159,448 Issue 3 Appointment of Deloitte & Touche LLP as Independent Auditors Shares For 83,098,662 Shares Against 80,632 Shares Abstain 97,850 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (b) Reports on Form 8-K The company did not file any reports on Form 8-K during the quarter ended March 31, 2001. On April 18, 2001, the company filed a report on Form 8-K disclosing that the company's board of directors had approved a new shareholder rights plan to replace the previous plan that expired May 6, 2001. On May 2, 2001, the company filed a report on Form 8-K disclosing that Consumer Car Club Inc. closed its carclub.com service and the company would write off its $3.2 million equity investment during the quarter ended June 30, 2001. 14 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE REYNOLDS AND REYNOLDS COMPANY Date May 11, 2001 /s/ Dale L. Medford ------------------------------- ------------------- Dale L. Medford Executive Vice President and Chief Financial Officer 15